The EUR USD felt pressure throughout the day following a report showing that the Euro Zone economy is worsening. Traders are beginning to think that the run-up in the Euro during December was a bit overdone and are now poised to push it to more acceptable levels. The charts indicate the first downside target is 1.3634.
Early last month the Euro surged when ECB President Trichet hinted at skipping a rate cut at the European Central Bank's next meeting on January 15. At the time he talked about watching the market and perhaps trying alternative ways to stimulate the Euro Zone economy. A few weeks ago the ECB lowered rates on deposits. This action put in the top and led us to where we are today.
Given the developing weakness in the Euro Zone, it looks as if the ECB has no choice but to lower rates to at least 2.5% in January. Traders are beginning to price in a cut to this level which should lead to more downside pressure in the Euro during the upcoming weeks.
More bad news out of the U.K. led to selling pressure throughout the day in the GBP USD market. Traders seem content with trying to push the Pound down to parity with the Euro. The Bank of England has been noticeably quiet during the recent weakness. This could mean it does not know what to do or that it is considering a blockbuster plan to revive the economy. Throughout December, Bank of England Governor Mervyn King hinted at trying to be more creative in fighting the economic decline. At this time it looks as if traders are not buying into his idea and instead are selling the Pound as if they are convinced rates will go to zero.
The USD JPY continued its rally on Friday on the strength of the stock market. Traders shunned the low yielding Yen and aggressively went after higher yielding assets. Last year risk aversion helped the Yen rally. On the first day of the new year, it looks as if an improved appetite for risk led to most of the downside pressure in the Yen. Fear that the Bank of Japan would initiate a series of interventions helped put in the bottom late last month, but it looks as if the need for a better return in exchange for a little more risk is going to help the Yen lose value.
The Canadian Dollar had a bad year in 2008 because of the drop in commodity prices. Friday’s surge in crude oil and other commodities helped the Canadian Dollar rebound somewhat from the recent downside pressure. There is no question that the Canadian economy has suffered because it relies so much on commodity exports. Although higher crude oil may help put in a temporary bottom, news that the Euro Zone economy is worsening should lead to less demand for Canadian exports. Do not expect too much from a rally. Based on the current state of the economy, look for the more downside pressure as traders expect the Bank of Canada to cut interest rates to zero.
Increased appetite for risk led traders to pull money out of the safe haven Swiss Franc. Look for the USD CHF to rally further as traders now feel the U.S. financial system has stabilized enough to take on more risky assets such as stocks and commodities. Economic pressure from the worsening recession in the Euro Zone may also lead to greater contraction of the Swiss economy. The Swiss banking system faces exposure to both Euro Zone and Russian economic weakness. If Euro Zone banks or corporations run into financial problems then look for it to show up in the Swiss banks. The Swiss economy is contracting so watch for the Swiss National Bank to continue to cut rates to zero.
The revived appetite for risk helped AUD USD post a strong gain on Friday. The chart pattern indicates there is still more room to the upside. Strong equity and commodity markets are needed to help drive the Aussie higher. As long as the fear of holding risky assets is subsiding, look for more upside action.
Strong gains in global equity markets led traders to seek opportunities in the higher yielding NZD USD. The short-term charts indicate that there is still more room to the upside. With its economy relying on commodities, it is going to take more sustained rallies in equities and commodities to continue to drive this market higher. The trend is up so continue to trade from the long-side. As long as traders are comfortable with taking on more risk, look for a higher New Zealand Dollar over the short-run.
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